Which Way Will the S&P 500 Index Resolve? (SPX)

The S&P 500 can rally, sure ... but currently, the path of least resistance for the SPX is lower

Over the past seven trading days and following the broad risk-off day of June 29, the S&P 500 has been wildly oscillating in a well-defined range. Twitter has become a hoot of late, with bears getting loud at the bottom of the range, and bulls pounding their chest at the top.

With overnight risk from China to Greece, this path of maximum frustration will continue until it doesn’t.

Traders and active investors need to either trade the immediate-term ranges in the S&P 500, or remain patient for a break in either direction to play out.

S&P 500 Charts

Starting off with the really big picture on the monthly chart (monthly bars) below, note that the month of June for the SPX was what we refer to as a bearish engulfing month, which fully engulfed the body (green part) of the price action of the month of May. The S&P 500 hasn’t seen a bearish engulfing candle in a long time, so traders certainly should take notice.

Moving over to the weekly chart, we then see the series of lower highs in the relative strength index at the bottom of the chart (negative divergence versus price that I have pointed out several times this year). These negative divergences are important to monitor, but really are only worth acting upon once price also goes the way of momentum (namely lower).

So far the S&P 500 is about 4% off its all-time highs set in May and still is holding the 2011 uptrend, which as we will see on the daily chart next, also coincides with the 200-day simple moving average. However, pressure on the 2011 support line is increasing, and thus the path of least resistance (from a multiweek perspective) is lower.

On the daily chart below, we see that the selling on June 29 broke the SPX below its support line from late 2014 and that this line has been acting as resistance during the past few days of choppy range-bound trading. The last few days of volatile trading has widened the average true range of the index, and that typically is a sign that a more powerful directional move lies ahead — if only for a few sharp days.

Everyone is focused on the 200-day moving average, which is still holding as support, and only marginally so. Keep in mind that the 200-day MA also coincides with the 2011 support line from the above multiyear weekly chart.

The odds favor a push lower below support and toward the 1,975-2,000 area before a better and more sustainable bounce can occur. In other words, if this week’s lows near 2,045 give, then a quick 2%-3% move could ensue.

Nimble traders: Take advantage.

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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.